Capital Structure Choices and Taxes: Evidence from the Australian Dividend Imputation Tax System

Garry Twite

International Review of Finance, 2001, vol. 2, issue 4, 217-234

Abstract: The introduction in 1987 of a dividend imputation tax system in Australia represented a significant change to the tax framework. To the extent that tax incentives influence the use of debt financing, changes in tax laws that alter these incentives will lead to changes in corporate capital structures. This paper examines the changes in corporate capital structure around the introduction of a dividend imputation tax system. The introduction of dividend imputation provides an incentive for firms to (a) reduce the level of debt financing utilized where this incentive varies across firms depending on the firm’s effective corporate tax rate, and (b) increase the level of external equity financing. The results present evidence consistent with these incentives.

Date: 2001
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